Hindustan Unilever (Q1 FY13)

CMP Rs443, Target Rs453, Upside 2.4%

• Q1 revenues matched our expectations by recording 13.7% yoy growth at ~Rs63bn, driven by strong ~21% yoy growth in HPC segment. Domestic FMCG business witnessed a healthy underlying volume growth of 9% 
• Soaps and Detergents segment witnessed 290bps expansion in EBIT margins at 12.2% on a low base. Personal products segment margins, however, declined 20bps to 25.8%
• Operating margins expanded by 140bps to 13.4% aided by 220bps reduction in raw material cost. Net profit registered 27.8% yoy increase at Rs7.3bn driven by strong topline growth and improved operating efficiency. Adjusted net profit more than doubled to Rs13.3bn due to an extraordinary income of ~Rs6bn from sale of prime real estate in Mumbai and Bangalore.
• We maintain Market Performer rating with a revised 9-mth target price of Rs453

Result table

(Rs m)	Q1 FY13	Q1 FY12	% yoy	Q4 FY12	% qoq
Net sales	62,502	54,959	13.7	56,605	10.4
Material cost	(33,677)	(30,798)	9.4	(31,223)	7.9
Personnel cost	(3,329)	(2,862)	16.3	(2,751)	21.0
Advertising cost	(8,196)	(6,330)	29.5	(6,773)	21.0
Other overheads	(8,921)	(8,356)	6.8	(8,578)	4.0
Operating profit	8,378	6,613	26.7	7,280	15.1
OPM (%)	13.4	12.0	137 bps	12.9	54 bps
Depreciation	(576)	(562)	2.5	(571)	1.0
Interest	(53)	(0)	-	(2)	-
Other income	3,472	1,436	141.9	1,754	98.0
PBT	11,222	7,486	49.9	8,461	32.6
Tax	(3,957)	(1,802)	119.5	(1,876)	111.0
Eff. tax rate (%)	35.3	24.1	-	22.2	-
Adjusted PAT	7,265	5,684	27.8	6,585	10.3
Adj. PAT margin (%)	11.6	10.3	128 bps	11.6	(1) bps
Extra ordinary items	6,047	588	929.3	281	-
Reported PAT	13,312	6,272	112.3	6,866	93.9
Ann. EPS (Rs)	13.4	10.5	27.8	12.2	10.3

Source: Company, India Infoline Research

Revenues in line with expectations
HUL Q1 FY13 revenues were in line with our expecations at Rs62.5bn – up 13.7% yoy, driven by 18.7% yoy growth in domestic FMCG business. Domestic FMCG business witnessed a strong underlying volume growth of 9% (10% in Q4 FY12).

Revenue break-up

	Q1 FY13	Q1 FY12	Growth	Q4 FY12	Growth
(Rs mn)	(3)	(3)	% yoy	(3)	% qoq
Domestic FMCG - HPC	49,256	40,832	20.6	44,802	9.9
Domestic FMCG - Foods	10,700	9,671	10.6	10,144	5.5
a) Domestic FMCG - Total	59,956	50,503	18.7	54,946	9.1
B) Others	2,545	4,456	(42.9)	1,659	53.4
Total (a+b)	62,502	54,959	13.7	56,605	10.4

Source: Company, India Infoline Research

The core Soaps and Detergents segment; contributing ~50% to revenues and ~40% to EBIT, outperformed the industry by registering 23.7% yoy growth at Rs31.6bn (strong double digit growth across all brands – double digit volume growth in Surf and Rin). Personal products segment recorded 16.7% yoy growth in revenues at Rs18.5bn primarily led by strong growth in skin care segment (double digit growth in all the key brands - Fair and Lovely, Ponds, Lakme). The growth could have been better but for the slower growth in toothpaste and shampoo segments due to intense competition. Beverages segment registered mere 7.4% yoy growth in revenues impacted by poor performance of mass segment tea brands. Revenues from the packaged foods segment witnessed 17.3% yoy increase at Rs4.4bn driven by Kissan and Kwality Walls (slower growth in Knorr impacted by slowdown in market).

Segment-wise revenue trend

Segments	FY11				FY12				FY13
(Rs m)	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1
Soaps & Det.	22,645	21,294	21,929	22,075	25,576	25,926	26,481	28,344	31,631
Personal Prod.	13,655	13,649	16,547	14,609	15,823	16,126	18,877	17,109	18,471
Beverages	5,378	5,700	6,022	6,347	6,092	6,533	6,709	6,832	6,541
Pkged Foods	3,158	2,744	2,700	3,174	3,725	3,318	3,067	3,481	4,370
Others	3,774	4,174	4,020	3,414	4,634	4,070	4,361	1,823	2,640
Total	48,609	47,560	51,218	49,618	55,849	55,973	59,495	57,588	63,651

Source: Company, India Infoline Research

Segment-wise EBIT trend

Segments	FY11				FY12				FY13
(Rs m)	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1
Soaps & Det.	2,488	2,501	1,693	1,650	2,361	3,212	3,559	3,201	3,852
Personal Prod.	3,388	3,140	4,769	3,652	4,107	3,940	4,881	4,492	4,757
Beverages	695	876	1,014	993	754	877	1,052	984	950
Pkged Foods	259	155	(166)	46	174	165	(60)	(37)	248
Others	(39)	6	42	152	237	162	344	(49)	(43)
Total	6,790	6,678	7,351	6,494	7,632	8,357	9,776	8,591	9,763

Source: Company, India Infoline Research

Operating margins expands by 140 bps… led by 220bps drop in raw material cost
Operating margins for the quarter expanded by 140bps to 13.4%, fuelled by a 220bps/90bps drop in raw material/overhead cost. The expansion could have been even better but for the 160bps increase in adspend (on a low base). We believe competitive intensity in the key categories (like soaps, detergents and shampoos) will compel the company to increase adspend in the coming quarters. This coupled with firm input prices will keep margins under check.

Cost analysis

As a % of net sales	Q1 FY13	Q1 FY12	bps yoy	Q4 FY12	bps qoq
Material cost	53.9	56.0	(215)	55.2	(128)
Personnel cost	5.3	5.2	12	4.9	47
Advertising cost	13.1	11.5	160	12.0	115
Other overheads	14.3	15.2	(93)	15.2	(88)
Total costs	86.6	88.0	(137)	87.1	(54)

Source: Company, India Infoline Research

Soaps and Detergents EBIT margins witness sharp 290bps expansion though on a low base
Soaps and Detergents segment EBIT margins expanded by 290bps to 12.2% though on a low base of 9.2%. Given the competitive intensity in such a key segment, improving/maintaining margins will be a challenge for the company. Personal products segment margins declined by 20bps yoy to 25.8% while, EBIT margins in the beverages segment expanded sharply by 210bps to 14.5%. Packaged foods segment reported a profit of Rs248mn – an increase of 42.6% yoy (a loss of Rs37mn during Q4 FY12).

APAT more than doubles, real estate sale helps
Net profit for the quarter recorded strong 27.8% yoy growth at Rs7.3bn – marginally above our expecations of Rs7.1bn, led by strong topline growth and improved operating efficiency. Adjusted net profit more than doubled to Rs13.3bn due to an extraordinary income of ~Rs6bn from sale of prime real estate in Mumbai and Bangalore.

Extraordinary items

Particulars	Q1 FY13	Q1 FY12
Profit from sale of properties	6,072	510
Restructuring costs	(26)	(60)
Write back of provision pertaining to a brand disposed in an earlier year	0	96
Profit on dilution of stake in erstwhile subsidiary	0	41
Total	6,047	588

Source: Company, India Infoline Research

Competition in core categories to increase further
HUL is focusing on new growth categories like high-end personal care (skin, hair care), foods and water. Going forward, the competitive pressure is expected to increase with more players entering the personal care and toilet soaps segments, which accounts for 78%+ of HUL’s sales. Improving/maintaining EBIT margins in the Soaps and Detergent segment will be a challenge for the company. Requirement of higher adspend on account of severe competition in core categories and higher input cost could put pressure on operating margins. At the current market price of Rs443, the stock is trading at 29.3x FY14E EPS of Rs15.1. Maintain Market Performer rating with a revised 9-mth price target of Rs453 (earlier Rs425).

Financial summary

Y/e 31 Mar (Rs m)	FY11	FY12	FY13E	FY14E
Revenues	193,810	217,356	245,152	277,524
yoy growth (%)	10.6	12.1	12.8	13.2
Operating profit	23,239	29,106	33,157	37,341
OPM (%)	12.0	13.4	13.5	13.5
Pre-exceptional PAT	20,992	25,725	29,101	32,658
Reported PAT	23,060	26,914	29,101	32,658
yoy growth (%)	4.7	16.7	8.1	12.2
EPS (Rs)	9.7	11.9	13.5	15.1
P/E (x)	45.6	37.2	32.9	29.3
Price/Book (x)	36.0	27.2	21.7	18.1
EV/EBITDA (x)	40.5	32.3	28.2	25.0
Debt/Equity (x)	0.0	0.0	0.0	0.0
RoE (%)	80.1	83.4	73.4	67.3
RoCE (%)	100.3	108.6	95.6	87.7

Source: Company, India Infoline Research